Terrestrial Broadcast Radio Industry Continues to Show Signs of Distress
By John Warren
Is it the end of days for traditional broadcast radio stations?
Terrestrial radio broadcasting has long been referred to as a fixed cost business. The costs required to broadcast a station’s signal, including FCC licenses, specialized equipment, leases and staffing costs required for administration, the sales team and 24/7/365 airtime coverage (which can be offset to some degree by replaying earlier programming or by licensing syndicated shows), are significant and must be paid. But, there is still no guarantee that anyone will tune in to listen. Simply put, due to the fixed cost nature of the business, there is little cost-cutting benefit available to owners and managers of terrestrial radio companies trying to improve the financial performance of their businesses.
This explains why owners and managers of terrestrial broadcast radio businesses are so keenly focused on increasing their market share and audience size (number of daily listeners). These companies generate revenue primarily from three areas: 1) sales of advertising space (“air time”) to local, regional and national customers; 2) sales of syndicated shows with famous or popular on-air personalities; and 3) re-broadcasting, endorsements, ad development and other services. When a station reaches a point where it controls a local or regional market it can begin charging a premium for its advertising airtime and increase revenue to grow the business or pay off debt.
One sure-fire way to capture market share and grow audience size—and hopefully revenues—is to buy it by making strategic acquisitions and M&A. Over the last 20 to 30 years, consolidation in the radio and broadcast media industry has been widespread and generally fueled by easy credit. In fact, radio station holdings of the 10 largest radio broadcast companies increased 15 times between 1985 and 2005. Owners and investors have shown an appetite for growth at almost any cost, taking on substantial debt to acquire competing stations at above-market pricing—all with the goal of controlling the local or regional market for radio advertising.
Notable radio M&A activity in the last decade include:
- CBS Radio Inc. and Entercom Communications Corp. finalized one of the largest merger transactions—valued at $2.86 billion—in which CBS Corp. spun off its radio unit. The deal made Entercom the second largest radio station owner with 244 stations in 27 markets, including 23 of the top 25.
- The largest deal following the Entercom/CBS merger was Starboard Media Foundation’s acquisition of Immaculate Heart Radio. The religious radio operator assumed an undisclosed amount of debt (estimated at $30 million) of Immaculate Heart’s owner IHR Educational Broadcasting.
- In 1998, Clear Channel Communications merged with Jacor Communications for $4.4 billion in what was the largest broadcast media transaction.
What could go wrong?
Enter the financial crisis of 2008.
When disaster struck, many small- to medium-sized businesses slashed their advertising budgets and maintained restrictions on such spending for multiple years. At the same time, developers of Internet technology, digital advertising and on-demand streaming services continued developing and making advances in learning how to play a bigger role in the lives of their customers.
After 2010, when businesses began recovering and slowly started returning to spending on advertising and marketing programs, not all of them went back to traditional radio media channels. Of those that did return, many reduced their participation levels, and included Internet and digital media advertising to diversify their media channel exposure. Internet-related, technology-based competition has been increasing and taking market share from traditional broadcast radio ever since.
Increased competition with sales and market share in decline are elements that characterize some major broadcast radio companies and media giants that took on high levels of debt to finance their growth. However, now instead of using free cash flow to grow from making opportunistic strategic investments, these companies are now forced to contribute all available free cash flow to satisfy their debt obligations. For some large national and regional terrestrial radio broadcast companies who used debt to fuel growth, the level of debt carried on their balance sheets is unsustainable.
Chapter 11 bankruptcy filings for terrestrial radio broadcasters and media companies have recently increased in both size and number, as companies seek protection from creditors to allow themselves time to reorganize and restructure their debts while learning to adapt to the competitive pressures of digital media. The recent filings by Cumulus Media, iHeart Media, Steel City Media and others have demonstrated that not even media giants and the industry’s market leaders are immune to significant changes in market dynamics caused by technology advancements.